Let the City moan - the people's Budget is still a winner

What this is about is making some enemies in the short term. Good. For it wasn't possible to cut the deficit without inflicting some pain

Is the Budget unravelling? The Finance Bill sailed effortlessly through its second reading in the Commons yesterday. But that won't stop the complaining. The City is moaning that the Chancellor didn't do enough to put the brakes on the consumer boom. The pound remains unsustainably high and even in this monolithically "on message" government, it isn't hard to find the odd minister fretting aloud in private about the high level of interest rates, raised another quarter point yesterday, and almost certain to go up yet another quarter before long. There is a ferocious backlash from the pension funds, including some operated by local authorities, about the fact that shareholders will lose their tax relief on dividends. The Liberal Democrats, not unreasonably, point out that Gordon Brown's upwards revision of the inflation forecasts means that he is preparing for an even more savage limit on public spending than he had previously let on. Quite a few economic analysts have found it impossible to resist the temptation to utter that hoary old truism, that budgets which look good on the day usually turn sour a couple of weeks later. Did we all get it wrong? In a Fabian Review article out today, Peter Mandelson claims the public is still brimming with an optimism that he attributes to his party's ability to make hard choices in opposition. But could it be, given that the Budget is by quite a long way the most important measure the Government has taken since it came into office, that it heralds something larger, if almost unmentionable, that an end to the Blair honeymoon could be in sight?

The two ways in which the Budget has attracted most criticism in the City is its perceived failure to curb consumer spending by not putting taxes up enough, and the ending of the tax credit on dividends to tax- exempt institutions. The first has been dispatched pretty comprehensively by Gavyn Davies, Goldman Sachs' chief economist, in this newspaper. He pointed out that the level of tax increases on consumers needed to replace a 1 per cent increase in base rates as a means of damping the consumer boom would be around pounds 9bn - something which very few people regard as feasible without forfeiting the trust of the electors. Never mind honeymoon's ending, this would be divorce.

There is a criticism that can be levelled at the Treasury which may help to account for some of the backlash: in the few days before the Budget, it allowed it to be thought that it would be just a little tougher than it turned out to be. There were no doubt reasons for that; first, it's quite common for governments - the last one made quite a habit of it - to raise expectations of tax increases so that everyone is pleasantly surprised when they aren't quite as big as feared. Second, given a context in which the Opposition had been arguing that there was no need for a Budget at all, it wished to prepare the ground by underlining Brown's belief in fiscal prudence. But the Treasury paid a price; someone's pleasant surprise is someone else's disappointment. And some in the City talked themselves into expecting more than Brown did.

Which was, in the end, quite a lot. For, as Davies also pointed out, the criticism rather misses the point that Brown did indeed produce a fiscally tightening Budget. Not many people before the election would have expected him to raise between pounds 3bn and pounds 4bn in each of two years (exclusive of the windfall tax) in his first Budget. Or that the hike would include additional consumer taxes, in the form of Miras cuts, increased stamp duty, petrol and tobacco taxes. Indeed the gamble Brown took was that some of Labour's supporters in Middle England may start grumbling when those rises, along with probable increases in contributions for those with personal pension plans, start to bite in the 1998-99 financial year. It seems, therefore, either churlish, or politically ultra-naive, to complain that he didn't do more.

It's what Nigel Lawson, after his own bruising encounter with it, called the "awesome power of the pension-fund lobby" in defending pension tax privileges that is underlying the second row, that over the scrapping of the dividend tax credit. But the industry should take a little care. It is not exactly basking in public esteem after the fiasco of the late Eighties in which insurers and financial advisers wrongly advised about half a million people to take out private plans instead of staying with good occupational schemes. Especially when so pitifully little so far has been done to compensate the victims. A little more effective competition in the interest of the consumer is way overdue. It's true that while the funds in around half the top companies running their own occupational schemes have huge surpluses, now being bolstered by the increasing stock market values, the other half don't. But employers have historically played fast and loose with their pension schemes, taking "holidays" from paying their own contributions when it suited them. Brown has done what the Tory administration began and what Stephen Dorrell, when he was the Conservative Treasury Financial Secretary, tried and failed to complete - for exactly the same reasons. He too wanted to discourage the short-termism by encouraging firms to reinvest as well as pay short-term dividends, but he was stopped by pressure from the likes of Lord Hanson on John Major.

What this is really about is making some enemies, at least in the short term. Good. It's rather a relief to find the Government doing just that. For it was never possible to embark on an ambitious programme to reduce the deficit without inflicting some pain somewhere. Brown did indeed decide, windfall tax included, to inflict in his first Budget most of it in the corporate sector rather than primarily on individuals, by ending a tax anomaly much cherished by a vested interest that had bothered the Treasury for a long time. The result, as it happens, is that the Budget was - and remains - highly popular, according to all known measurements of public opinion. It may get a little less so when those taxes on consumers begin to bite. But those who argue for - say - immediate and total abolition of Miras, while defending the dividend tax credit, are merely saying that more of the revenue burden should fall on the middle-income homeowners and less on City institutions.

So Brown still looks as tough and populist as he did on 2 July. One further small but symbolic suggestion for how Blair and Brown could demonstrate both qualities still further: they should insist that another one-time opponent of the dividend tax credit measure, the former BP chairman Lord Simon, divests himself of the pounds 2m in BP shares he was inexplicably allowed to keep when he came into office.